Has Morgan Stanley become a second tier bank?
Even before today's news of $5.4bn in property losses, Morgan Stanley wasn't looking too healthy.
In James Gorman's letter to shareholders, published this week, he said he wasn't happy with Morgan Stanley's performance last year.
Gorman has reason to be displeased, and not just with 2009.
According to the recent report from Mercer Oliver Wyman, Morgan Stanley's saw its share of equity sales and trading revenues go from 8.8% globally in the first half of 2007, to 6.9% in the second half of 2009. In FICC it went from 8.5% to 7.2%, and across investment banking as a whole its revenue share plummeted from 14.0% to 9.9% over the same period.
James is doing his best to remedy this. As the Wall Street Journal points out, Morgan Stanley has hired 350 people in sales and trading
(but mostly in sales) over the past year, and reorganised its bond trading business.
Sanford Bernstein analyst Brad Hintz outlined the vision for Morgan Stanley's future in a recent research note. "The new Morgan Stanley will ultimately be a less capital intensive, lower risk company than the MS of 2006- 2007," he wrote last month. "Nearly one half of Morgan Stanley's normalized revenues will be generated by Wealth Management....The New Morgan Stanley will also be a fixed income flow trader, profiting from pattern recognition of client demand shifts."
For the moment, however, the new fixed income flow trading Morgan Stanley has yet to emerge.
US analyst Dick Bove predicts that Morgan Stanley will have a "very messy" first quarter due to losses on a casino investment. Bove also predicts that it will take Morgan Stanley four to five years to get where Goldman is now in terms of trading (by which time Goldman's likely to be somewhere else).
"Like watching grass grow (very slowly)"
Next week's results will reveal the extent to which Morgan Stanley has closed the Goldman gap, but even Hintz isn't holding his breath. "[When you hire 350 salespeople] it takes time to get them to work together," he told the Wall Street Journal. "It's like watching grass grow."
In the meantime, headhunters in London say Morgan Stanley continues to hire for sales and trading, and there's the possibility of another 100 equities traders joining this year. The bank has also been consolidating its position in M&A, where it was the clear winner in Europe during the first quarter.
The reality is, however, that Morgan Stanley's first tier M&A bankers will have to hope that the bank's second tier sales and trading franchise grows into the challenge before the end of 2010. If not, they'll be subsidising it for the second year a row.
